Union to challenge UK law on ethical investment

Fight continues over Merseyside pension fund’s investments in companies linked to the arms trade.

One of the biggest legal barriers to UK pension funds making ethical decisions on their investments – the Cowan v Scargill ruling – could face a legal challenge from trades unions as part of an ongoing battle over the investment policy of the £4.2bn (€5.8bn) Merseyside pension fund.
Members of the Trades Union Congress (TUC), the umbrella organisation of UK unions, say they are taking legal advice after the fund’s trustee board voted against resolutions to halt investments in companies involved in the arms trade.
The unions say they will mount a fresh challenge to the pension fund’s investment policy at a meeting on January 28th.
In November, 2007, the Merseyside Pension fund trustee board voted unanimously against motions put forward by the councils of Liverpool and St Helens to ban arms investments. Liverpool council’s resolution said: “Investment in the arms trade is not compatible with good corporate, social and ethical governance”. The councils have two trustee representatives on a board of seventeen.Alec McFadden, president of the TUC in the North West of England, said the union, which has members that belong to the scheme, wanted withdrawal of money from companies producing cluster bombs. He said it was contacting European pension funds who have made similar boycotts: “We want to fight the fact that the pension fund is invested in these companies and we are being told that the reason is because it has to invest for purely financial reasons because of Cowan v Scargill. We disagree and we will fight this.”
Dutch pension giants ABP and PGGM stopped investing in companies making cluster bombs after coming under fire in a Dutch current affairs programme that prompted thousands of complaints from pension scheme members. McFadden said the union had taken legal advice over a challenge to Cowan v Scargill and that lawyers have told it they could take the case on pro bono.
The Merseyside pension fund is understood to have about £14m linked to investments with firms that are involved in aspects of the arms trade, including BAE, Boeing and Rolls-Royce, much of which is invested in passive funds.
Peter Wallach, head of pensions at Merseyside, said: “This is a sensitive subject that we are addressing thoroughly. The pension fund is a signatory to the UN Principles for Responsible Investment (UNPRI) and our trustee board has voted in favour of engagement with companies on these issues rather than divestment, as outlined in the PRI. The UK taxpayer underwrites the pensions of the Merseyside fund and we have taken legal advice, which has told us that if a company is undertaking legal business then there is no reason not to invest in it.” In the 1984 Cowan v Scargill case, the High Court ruled that the pension fund of the National Union of Mineworkers could not prohibit investment overseas or in industries in direct competition with the coal industry, which it said could damage returns on the fund’s investments. The ruling has since been held up as a fiduciary test for pension funds to invest for maximum returns only. However, a legal opinion from UK law firm Freshfields in October, 2005, challengedthis orthodoxy, saying that Cowan v Scargill had been interpreted too broadly. It said: “the courts would in many circumstances view investment decisions that are made having regard to environmental, social and governance (ESG) considerations as appropriate.” Non governmental organisations argue that the failure to discriminate between civilians and combatants in war zones is a violation of international humanitarian law and that cluster bombs should be banned via international convention such as the Ottawa Convention on anti-personnel landmines that came into force in 1999. 
The Oslo Process, launched in February 2007, was the start of government discussions to this end. Difficulties related to the technical definition of cluster bombs were raised at the second conference, which ended in May 2007. Governments that took part in the conferences promised to devise a treaty to prohibit cluster bombs “that cause unacceptable harm to civilians” before the end of 2008.